On performance: "For the ninth time in 48 years,
Berkshire's percentage increase in book value was less than the
S&P's percentage gain (a calculation that includes dividends
as well as price appreciation). In eight of those nine years, it
should be noted, the S&P had a gain of 15% or more. We do
better when the wind is in our face. To date, we've never had a
five-year period of underperformance, having managed 43 times to
surpass the S&P over such a stretch."

On Berkshire's future leaders: "Todd
Combs and Ted Weschler, our new investment managers, have
proved to be smart, models of integrity, helpful to Berkshire in
many ways beyond portfolio management, and a perfect cultural
fit. We hit the jackpot with these two. In 2012 each outperformed
the S&P 500 by double-digit margins. They left me in the dust
as well. ...Todd and Ted are young and will be around to manage
Berkshire's massive portfolio long after Charlie and I have left
the scene. You can rest easy when they take over."

On investing: "There was a lot of hand-wringing
last year among CEOs who cried 'uncertainty' when faced with
capital allocation decisions (despite many of their businesses
having enjoyed record levels of both earnings and cash). At
Berkshire, we didn't share their fears, instead spending a record
$9.8 billion on plant and equipment in 2012, about 88% of it in
the United States. That's 19% more than we spent in 2011, our
previous high. Charlie and I love investing large sums in
worthwhile projects, whatever the pundits are saying ... We will
keep our foot to the floor and will almost certainly set still
another record for capital expenditures in 2013. Opportunities
abound in America."

On confidence: "A thought for my fellow CEOs: Of
course, the immediate future is uncertain; America has faced the
unknown since 1776. It's just that sometimes people focus on the
myriad of uncertainties that always exist while at other times
they ignore them (usually because the recent past has been
uneventful). American business will do fine over time. And stocks
will do well just as certainly, since their fate is tied to
business performance. Periodic setbacks will occur, yes, but
investors and managers are in a game that is heavily stacked in
their favor. (The Dow Jones Industrials advanced from 66 to
11,497 in the 20th Century, a staggering 17,320% increase
that materialized despite four costly wars, a Great Depression
and many recessions. And don't forget that shareholders received
substantial dividends throughout the century as well.)"

On the recent Heinz deal: "We couldn't be in
better company. Jorge Paulo is a longtime friend of mine and an
extraordinary manager. His group and Berkshire will each
contribute about $4 billion for common equity in the holding
company. Berkshire will also invest $8 billion in preferred
shares that pay a 9% dividend. The preferred has two other
features that materially increase its value: at some point it
will be redeemed at a significant premium price and the preferred
also comes with warrants permitting us to buy 5% of the holding
company's common stock for a nominal sum. Our total investment of
about $12 billion soaks up much of what Berkshire earned last
year. But we still have plenty of cash and are generating more at
a good clip. So it's back to work; Charlie and I have again
donned our safari outfits and resumed our search for elephants."

On market timing: "Since the basic game is so
favorable, Charlie and I believe it's a terrible mistake to try
to dance in and out of it based upon the turn of tarot cards, the
predictions of 'experts,' or the ebb and flow of business
activity. The risks of being out of the game are huge compared to
the risks of being in it."

On the competition: "There are a lot of ways to
lose money in insurance, and the industry never ceases searching
for new ones."

On a coming reckoning: "Insurance earnings are
now benefiting from 'legacy' bond portfolios that deliver much
higher yields than will be available when funds are reinvested
during the next few years -- and perhaps for many years beyond
that. Today's bond portfolios are, in effect, wasting assets.
Earnings of insurers will be hurt in a significant way as bonds
mature and are rolled over."

On diversification: "If the insurance industry
should experience a $250 billion loss from some megacatastrophe
-- a loss about triple anything it has ever experienced --
Berkshire as a whole would likely record a significant profit for
the year because it has so many streams of earnings. All other
major insurers and reinsurers would meanwhile be far in the red,
with some facing insolvency."

On valuation: "Of course, a business with
terrific economics can be a bad investment if the price paid is
excessive. We have paid substantial premiums to net tangible
assets for most of our businesses, a cost that is reflected in
the large figure we show for intangible assets. Overall, however,
we are getting a decent return on the capital we have deployed in
this sector. Furthermore, the intrinsic value of the businesses,
in aggregate, exceeds their carrying value by a good margin. Even
so, the difference between intrinsic value and carrying value in
the insurance and regulated industry segments is far greater. It
is there that the huge winners reside."

On risk: "Charlie and I believe in operating
with many redundant layers of liquidity, and we avoid any sort of
obligation that could drain our cash in a material way. That
reduces our returns in 99 years out of 100. But we will survive
in the 100th while many others fail. And we will sleep well in
all 100."

On share repurchases: "Indeed, disciplined
repurchases are the surest way to use funds intelligently: It's
hard to go wrong when you're buying dollar bills for 80¢ or less.
We explained our criteria for repurchases in last year's report
and, if the opportunity presents itself, we will buy large
quantities of our stock. We originally said we would not pay more
than 110% of book value, but that proved unrealistic. Therefore,
we increased the limit to 120% in December when a large block
became available at about 116% of book value."

More on BerkshireWarren
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